Q2 2012 District of Columbia, District of Columbia Office Market Trends

The 102-million-square-foot Washington, D.C. office market remains quiet at the 2012 midpoint. Leasing activity is “sluggish,” according to Cushman & Wakefield, while Jones Lang LaSalle notes “political and economic uncertainties.” Reis reports a dip into negative net absorption, though not at a high level. This market began the year on quiet note and that situation has prevailed thus far.

OCCUPANCY

Reis reports a 9.4% second quarter 2012 vacancy rate for general purpose, multi-tenant office space in Washington, D.C., unchanged from the prior quarter but up 40 basis points over 12 months. Class A vacancy finished the quarter at 9.6%, also unchanged over the quarter, up 30 basis points year-over-year. The Class B/C rate finished the second quarter at 9.2%, up 10 basis points for the quarter and up 50 year-over-year. With the threat of mandated government spending reductions in the future (called sequestration), an unchanging vacancy rate can be considered a good sign.

Jones Lang LaSalle reports a total vacancy rate of 11.2% for Washington, D.C. and 14.6% for the D.C. metro area. “Leasing activity in the Washington region remained depressed as government contractors, law firms and federal agencies were reluctant to commit to long-term space decisions,” this source reported. Studley, Inc. reports a Washington, D.C. availability rate of 12.6%. “In the District, availability rates continued to inch upward,” this source reports. In their August report, Cassidy Turley forecasts a 2012 vacancy rate of 11.0% for the District. Cushman & Wakefield reports a second quarter overall vacancy rate of 12.5%, up 100 basis points over 12 months. “Overall vacancy rates in the District ticked up for the third consecutive quarter,” this source notes. Reis forecasts the rate to finish 2012 at 9.4%. Reis forecasts only slight increases in the rate, in the range of a few basis points, the next two years. The D.C. rate is forecast to remain below the U.S. average but the gap will close.

SUPPLY AND DEMAND

Net absorption in the Washington, D.C. office market was negative during the second quarter at 27,000 square feet, according to Reis. This negates the 29,000 square feet of positive absorption seen in the first quarter. The half-year performance mirrors, in a way, the demand pattern of 2011, where the first half of the year was strongly positive but the second half was slightly negative. The net absorption total for the year was 944,000 square feet absorbed, on the positive side. A more modest 374,000 square feet is this year’s total forecasted demand.

For all of 2011 Reis reports 635,000 square feet completed, led by the 450,000-square-foot Square 54. Reis predicts 2012’s sole completion within established submarkets will be the 394,000-square-foot office tower, at 1000 Connecticut Avenue in the Downtown submarket, set to complete in July. A 100,000-square-foot project outside of Reis submarkets is forecast to complete in October of this year. For 2013, Reis reports four multi-tenant projects within established submarkets totaling 783,000 square feet. The largest is 3 Constitution Square, at 345,000 square feet, followed by the second phase of Sentinel Square, at 278,000 square feet. Reis predicts 2012 net absorption will closely match the level of new construction, a pattern expected to persist through the forecast period. More substantial annual construction and absorption totals, in excess of 1 million square feet, are forecast to prevail starting in 2013.

Cushman & Wakefield reports 1.8 million square feet under construction or renovation and a direct year-to-date net absorption total of negative 350,161 square feet. “Although new tenant demand remained decidedly weak at the end of the second quarter of 2012, the lack of speculative deliveries helped provide a sense of balance from a demand perspective,” notes Jones Lang LaSalle. Cassidy Turley reports that “absorption in the Washington, D.C. Metro area will total negative 360,000 square feet in 2012, driven mostly by Base Realignment and Closure Commission (BRAC) relocations and slow private sector growth.”

RENTS

The D.C. office market posted barely recordable rent gains in the second quarter, not a surprise given the relative sluggishness of the market. Reis reports second quarter asking and effective rents for general purpose, multi-tenant office space at $49.54 psf and $41.93 psf, respectively, both up 0.1% for the quarter. Year-over-year gains are 1.0% and 1.4%. It appears that D.C. landlords are facing another year of inactive, or barely active, rents. The Class A asking rent increased 0.1% in the second quarter to finish at $54.14 psf. The Class B/C asking rent also increased 0.1% to $42.73 psf. Year-over-year gains are reported at 1.0% and 0.8%.

Cushman and Wakefield reports an overall weighted gross average rental rate of $50.28 psf, and a direct weighted average Class A rate of $60.81 psf. “Direct asking rents for all classes of space have remained flat over the past year, at $51.40 per square foot (psf),” this source reports. “Rising vacancy, particularly in second-generation and commodity segments, will likely continue to depress net effective rents across the region and create compelling values for tenants,” Jones Lang LaSalle reports. This source gives an average asking rent of $50.40 psf for D.C. and $34.96 psf for metro Washington. Although asking rents are forecasted to inch up, effective rents “are expected to remain essentially flat in most submarkets through 2013,” according to Cassidy Turley. This source forecasts a 2012 asking rent of $50.00 psf for the District, with a $1.00 increase for 2013.

Studley, Inc. reports D.C. Class A rates at $52.13 psf, up 1.3% “quarter-on-quarter.” Asking rental rates in D.C. increased by 1.5% to $47.94 psf. This source notes that “the increase can be explained, in part, by the relative popularity of lower-priced spaces this quarter (especially Class B) that were taken off the market by value-driven tenants.” At quarter close, the rental outlook for the D.C. office market remains, at best, reserved. Reis forecasts asking and effective increases of 1.3% and 1.6% in 2012; not until 2014 are both measures forecast to increase by more than 2.0%.